Why Tim Geithner Needs to Resign

In its article this morning, the Washington Post lays out a pretty clear case of negligence on the part of Timothy Geithner. First let me say that I have nothing against this man: he seems to be brimming with intelligence, speaks Japanese and Chinese, is very cosmopolitan and a hard-worker (works out at 5:30am, comes to work at 6:30 and works 15 hour days often including the weekends). He also has the least envious job of all in the administration: he is a Treasury Secretary at a time of an economic meltdown we haven't seen since the Great Depression. The mere fact that most Americans know who our Treasury Secretary is (and that I am writing about him) shows the extent of trust we have justifiably placed in the government to fix this mess. This is all the more reason why Timothy Geithner needs to resign.

The Washington Post article reveals that the Fed was informed 3 months ago by the AIG that it would pay bonuses to the financial division executives (you know the ones who flushed the company down the toilet) by March 15 deadline. This detail was also put into the company's quarterly filing at the end of the year. So the Treasury Department had a responsibility to know this detail and inform the President about it. The President learned about the bonuses two days ago and was, in the words of his adviser David Axelrod "aggravated" and "a little bit disbelieving." What Obama was aggravated about was not the actual bonuses, since this was to be expected, but the failure of the government to stop them. Tim Geithner said there was nothing the government could do.

While that may be the case now and there is absolutely no way the government can break its contract (which would only further weaken the confidence in the economy), Tim Geithner should have definately seen this one coming. In Sept last year he was the main architect of the first round of bail-out of AIG. After working through the night, Geithner and other NY Fed officials realized the extent of AIG's tentacles throughout the global economy. At the time he wasn't focused on bonuses because he was not a member of a political administration and was thus not really exposed to public pressure. Now, he is. He is Obama's face of the economic rescue efforts and if the public does not have an absolute confidence in these efforts the whole fragile house of cards that Obama has built (and which is already showing signs of working) will collapse.

What is particularly disturbing about the case is the perception of Geithner. I have no doubt he is an honorable man with a strong sense of public service and he wants to do the right thing. He has also been hampered by vacancies in the Treasury Dept due to the slowness of the confirmation process. However, his intimate involvement with the early AIG bailout creates the perception of an impropriety. While there is no evidence there was any such impropriety, the perception is the what matters in both, politics and the economy. So, he should instruct Obama to find another secretary (Paul Krugman please!!) and step aside after Obama has settled on a pick.

In the end, I still think the bailout of AIG and the rest of the financial industry was an absolute necessity. As I am not an economist, I have tried to educate myself about the crisis by reading economists' (not politicians') analyses, including the Nobel Laureate Paul Krugman. They all argue that the extent of AIG in businesses throughout the world as insurers of millions of pension plans, mutual funds, etc, were just simply too much of a glue for the global economy for it to fail. Economic analysts have carefully outlined the aftershocks' of Lehman Brothers' failure last fall which literally caused a collapse of Iceland (yes the entire country) and seriously damaged the European banking system. AIG was even bigger.

Now after we get out of this mess (and we will soon) then we can talk about the argument that "if they are too big to fail, they are too big to exist." Expansion of these companies, often violating anti-monopoly laws, went on without any regulation from the SEC, the Fed, or the Bush White House (of course!). So tighter regulation and an outright ban on credit default swaps has to happen soon. However, I am also afraid that limiting expansion of these companies in the future will undermine the very logic of greed that is (for better or for worse) the engine of capitalism. As Marx aptly concluded some 200 years ago, it is the inherent nature of capitalism to expand. If it doesn't, it fails. Simple as that. So I guess we will always be doomed to periodic crises during which we will always promise to do it better the next time. As soon as the crisis ends, however, the capitalism resumes its risky path.